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Reform of Investment Treaty Arbitration in CETA: An Initiative for a Multilateral Investment Court

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On May 16, 2017, Bill C-30 –the proposed legislation to implement the Canada-EU Comprehensive Economic and Trade Agreement (CETA) at the federal level– received Royal Assent by Canada’s Governor General.  While this sets in motion the provisional application of CETA domestically and complements the European Parliament’s own approval in February this year, CETA’s full implementation, including for most investment-related provisions, awaits a final round of internal ratification procedures by all EU Members.

This final stage will require patience on the part of stakeholders as domestic approval processes are gradually completed. Still, the enactment of Bill C-30 marks a major step toward the full implementation of CETA and an equally important departure from the traditional paradigms of investor-state dispute settlement (ISDS). Not only does CETA represent significant forward movement in the very substance of investment protection, it also establishes an innovative mechanism to resolve investment disputes through a permanent investment court system (ICS). The ICS is admittedly not an end in itself. According to the EU, the ICS is also a means intended to serve as a “stepping stone” towards the establishment of a permanent multilateral investment court (MIC). The project is now formally endorsed by Canada.

Responding to growing public unease with the current system of bilateral international investment protection and ad hoc dispute arbitration, CETA represents a coherent answer to the legitimacy crisis of the current investor protection system. Although still perfectible, the CETA model symbolizes a tectonic shift in both trading partners’ policy approach to salient concerns with ISDS.

Among the key features of the system is the permanence of its proposed investment courts. In creating permanent, two-level tribunals, the Parties intend to generate a greater level of consistency and predictability in the interpretation and application of CETA, firstly as a result of the limited number of dispute adjudicators and secondly because the creation of an appellate tribunal will lead to a harmonized body of case law. The functioning of the WTO Appellate Body bears witness to the latter observation in the context of interpreting WTO law.

1)            Forthcoming Establishment of an Investment Court System

The ICS embedded in CETA marks an important departure from both standard ISDS, where each disputing party appoints one arbitrator, and the system proposed in the stalled Trans-Pacific Partnership (TPP), where despite reforms in some areas awards were still rendered by party-appointed arbitrators and remained shielded from appellate scrutiny.

The ICS is a crossbreed between traditional investment arbitration and permanent judicial institutions. In line with its EU-Vietnam brethren, CETA’s ICS is modelled on the WTO dispute settlement system, thus promoting long-called-for confluence between the two systems. The ICS indeed features a permanent two-level dispute settlement body for ISDS: a first instance tribunal composed of fifteen publicly-appointed members for five-year terms and an appellate tribunal the number of whose members remains to be determined.

The first instance tribunal will adjudicate disputes in divisions of three members assigned in such a way as to ensure the rotational and random composition of divisions.  It bears noting that the tribunal is not a standing court, since it does not rest on an institutionalized seat or courthouse. Nor does it have permanent judges as members. As an alternative, CETA sets out a system of monthly remuneration paid by public funds to the tribunal’s members with a view to ensuring their availability.  As such, members only exercise their adjudicatory functions as disputes may arise under the CETA’s investment provisions. In such cases, fees will accrue similarly to the current ISDS model.

In a specific set of circumstances, an appellate tribunal may be called upon to review (i.e. uphold, modify or reverse) the first instance tribunal’s award.  The administrative functioning of the appellate tribunal remains to be determined. These matters include the procedures for the initiation and conduct of appeals, remuneration of the members, administrative support and costs of appeals.

2)            Towards a Future Multilateral Investment Court

Earlier this year, Canada and the EU co-sponsored an informal ministerial discussion where both Parties campaigned for the “creation of a new, fully inclusive, multilateral investment dispute settlement mechanism, with all necessary guarantees of legitimacy, legal correctness, transparency, predictability and efficiency”.  This endeavour gives forceful expression to both Parties’ ambition to go over and above the creation of bilateral structures for ISDS.

Before Canada followed suit, the establishment of a MIC was the EU’s flagship policy response to the systemic concerns flowing from traditional ISDS –e.g. interpretative incoherence across treaties, issues of cost efficiency, public suspicion in party-appointed adjudicators, and the consequent backlash against the investment dispute settlement system itself– that result from the current proliferation of differing dispute settlement systems.

Yet, efforts to multilateralize an investment tribunal are not without hurdles. One prominent challenge is that an envisaged “fully inclusive” MIC should ideally adjudicate disputes arising not only under future bilateral or plurilateral investment treaties but also existing ones. Since the overwhelming majority of first-generation investment treaties do not have institutional structures or built-in mechanisms for adaptive purposes, it has recently been proposed that this could be achieved through means of an “opt-in” instrument comparable to the Mauritius Convention on Transparency in Treaty-based Investor-State Arbitration, under which states could agree to use the new court in respect of existing treaties.  While the manifold challenges of reforming ISDS are admittedly more daunting than the introduction of a transparency rule in investment treaties, the Mauritius Convention could provide a benchmark for states to pursue investment law and policy reform initiatives at the multilateral level. Another challenge for inclusiveness is that not all countries could have nationals appointed as adjudicators in the multilateral court. To resolve this issue, it has been suggested that adjudicators could be appointed not by the treaty parties, but instead –as for the election of judges at the International Court of Justice– by a multilateral body that is deemed to represent the interests of the international community.

It is beyond the scope of this note to examine in detail all opportunities and drawbacks associated with the proposed MIC or, going further, to discuss the desirability of multilateral rules on investment. The section below, however, provides a snapshot of the importance of such initiatives in a context characterized by ever greater convergence between investment and trade.

3)            Looking Back and Forward on Investment and Trade through the Prism of a MIC

The rapid expansion of global value chains over the past 20 years brought about a web of indissociable ties between investment and trade. The fragmentation of production, particularly in the manufacturing and service industries, recalls the need for greater policy coherence in the trade-investment interface fields, which have long been discussed in parallel vertical silos in near-isolation from each other. Such a paradigm change raises a number of critical questions regarding “the utility of the predominantly bilateral approach to international investment law, which is based on the assumption that there is one home country investor making an ‘investment’ in a host country”.   While the present legal regime may still cater to the traditional “bricks-and-mortar” economy, it is arguably ill-equipped to contend with the more complex business relationships arsing in a world of cross-border production networks.  The decision by the CETA Parties to establish permanent investment dispute adjudication mechanisms offers credible means to address and balance the evolving needs and expectations of all stakeholders in an environment marked by ever greater convergence in the interpretation of trade and investment law provisions.

Prospects for a MIC will nevertheless hinge on a number of open questions and institutional issues that command consensus globally. The success of any such norm-setting endeavour will depend critically on the political willingness of other key capital-exporting economies, such as China, India and the United States, to join forces in this project. However ripe the moment may be for constructive discussions centred on the creation of a MIC, the oft-repeated criticism of the new U.S. administration levelled at the judicial branch of the WTO suggests that prospects of U.S. participation in efforts to institutionalize investment arbitration along the lines of CETA may be a longish obstacle course. This, in turn, may prompt like-minded protagonists of investment protection and ISDS reform to first consider a plurilateral avenue while continuing to embed CETA-like provisions in new bilateral treaties.

Jean-Philippe Herbert B.C.L. (McGill); LL.B. (McGill); Master of International Law and Economics (WTI, University of Bern, exp. 2017). The author is grateful to Pierre Sauvé for helpful comments and discussions on an earlier version of this note. All views expressed are mine.

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